In
my humble opinion, the Bay Area office market reached its peak in March of
2000. In no shape or form has
the market crashed, and in some sub regions playing market “catch-up,”
rental rates are still increasing. However,
in my discussions with scores of senior office leasing brokers from around
the Bay Area, there appears to be a slight softening in demand.
The white-hot frenzy, in part fueled by dotcommers willing to spend
whatever it took to secure office space, has been significantly tempered by
a need to conserve the burn rate of startups.
Paying less rent or taking less space extends the lifeline of the
company. The venture capital
pipeline is still open for potentially profitable enterprises, but the
pipeline diameter has shrunk considerably.
I’ve heard a number of San Francisco office brokers concede that
rental rates and terms achieved in February/March would not be possible
today. There are also a number
of e-commerce companies being “rightsized” (we haven’t heard that term
for awhile). I recently ran an
ad for an executive assistant and discovered a new source for identifying
downsizing dotcommers. However,
that said, instead of a white-hot office market we are still in a “hot
office” market and whereas in the past, 10 bidders would be fighting over
a single office availability, today two or three prospects show up to do
battle. Also, last month I
experienced an event not seen since the mid-1980s.
A landlord went to market $12/year over the last recent comparable,
saw all five prospects disappear to other properties and called me two weeks
later lowering the rent $6/year and doubling the TI’s.
As someone specializing in tenant representation, we need more
available office space. Hey,
with vacancy rates in the 1 to 3 percent range in most sub markets, having a
5 to 7 percent stabilized vacancy rate might be healthier in the long run
for almost everyone. . .
An interesting article titled, “What do we do with High-tech Tenants?” in the National Real Estate Investor, June 2000 issue: “Someone’s dog trots down the middle of the wide-open, exposed brick warehouse space. A pool table sits ready for play next to the receptionist and twenty-something workers with a million bucks drift in wearing jeans. There’s a basketball court, in-house espresso machines and places to just hang out. The floor is concrete, the ductwork is exposed and the space cost $65 per square foot. Welcome to the 21st century office market.” In another section, “High-tech companies have high-tech needs. If landlords expect to attract and retain high-tech tenants, they will have a sound strategy for supplying high-speed Internet access, redundant power and the flexibility within these systems to grow and change. And they must deliver this in a cost effective way.”
I predict that an increasing number of old-line industries, who do not rely on the Northern California labor pool and who can replace most of their employees in a relocation to less-expensive parts of the U.S. will do so. Those contemplating reducing rental rates by 50 percent or more, being able to offer housing in the $100,000 to $150,000 range, lower wages and probably lower business taxes, should first do a thorough investigation into whether any of your key management or technical employees will relocate regardless of how large a carrot you offer them. In discussions with a number of R.E. directors who went through this exercise, it seems that the magnetic lure of the Bay Area will cause 80 to 95 percent of your employee base to stay behind and probably increase their pay by jumping ship. If you still want to head to Tennessee or North Carolina, call me and we’ll backfill your space in a flash! Those industries requiring our labor pool will remain and grow. The diamond merchants and fashion markets in New York were also dependent on location, regardless of the cost. Sure, a diamond cutter could move his business in the 1920’s to Nebraska to save rent, but in reality the synergy of being in the center of that particular industry outweighed the cost differential. The San Francisco Business Times June 9, 2000 announced that Toysrus.com will be moving part of its operations to San Francisco. “This is a move to surround ourselves with the best talent in the industry,” company spokeswoman Kim Paone said. They could have gone anywhere, but didn’t . . .
Deals and Rumors: In the last issue of OfficeTimes (6/1/00) I announced 3,700,000 sf of Bay Area (not including Santa Clara) office leases done during April and May. During these past 60 days another 2,140,000 sf of office transactions were announced as follows: In Walnut Creek, I leased Aevia 12,000 sf at 3021 Citrus Circle, as well as handling the 60,000 sf renewal for Teradyne, Inc. at 2625 Shadelands Drive and a 9,000 sf lease to The Outsource Group at 1646 North California Blvd. (relocating from San Francisco). In Pleasant Hill I did a sublease from BAM Media to ecBridges of 14,000 sf at 3470 Buskirk Avenue. In Concord, I leased 9,000 sf at 2300 Clayton Road to 0-1 Inc.; Pacer International leased 14,000 sf also at 2300 Clayton Road; Motorola leased 14,000 sf at Sutter Square. In San Ramon, Lucent leased 60,000 sf at BR3. Dublin was on fire, with EMC Corp. taking 35,000 sf at Koll Dublin Corporate Center, and at the same project, Quintus might be leasing 100,000 sf and SuperGen 50,000 sf. Also in Dublin, rumors are that Commerce One will be building a 760,000 sf office campus. In Pleasanton, InterPro Business Solutions is taking 18,000 sf at 7901 Stoneridge, Mobilem is leasing 24,000 sf at Hacienda Lakes, EduNet is taking 19,000 sf and Parker Vision 16,000 sf, both at Chabot Center, and Shurex might be leasing 15,000 sf at 6670 Owens Drive, Webtelintcom leased 18,000 sf at 4566 Owens, Robert Half just completed its seventh expansion to take an additional 77,000 sf at Britannia 8, and the big news was PE BioSystems announcing it is in the process of planning a 960,000 sf research campus on the 80 acre Kaiser Sunol property. Tri-Valley office park sales comps include Park Plaza selling 87,000 sf for $17.5 million, 7901 Stoneridge selling 171,000 sf for $28 million, Bernal Corporate offering 1.1 million sf for $220 million and Livermore Legacy Tech Park selling 145,000 sf for $20.3 million. In Oakland, Rutherford & Chekene leased 17,000 sf at 427 13th Street, and Simeon is reportedly buying 180 Grand Avenue with 275,000 sf at $165/sf. In Berkeley, SPM MicroSystems is leasing 35,000 sf at Golden Bear on University Avenue. Up in Richmond, Brightpoint Subscriber Services is taking 58,000 sf at Harbour Business Center. Over in San Francisco, Moai Technologies leased 18,000 sf at 139 Townsend Street; Red Herring is expanding into 44,000 sf at 2828 18th Street; IXL Enterprises is taking 94,000 sf at 575 Market Street; EmployeeService.com took 40,000 sf next door to the Golden Gate Theatre; Preston, Gates, and Ellis LLP is leasing 43,000 sf at One Second Street, and VISA USA is leasing 40,000 sf at 123 Mission Street. Down in Brisbane, at the Opus West Sierra Point, Epinions is leasing 25,000 sf, Classroom Connect 25,000 sf, Turbolinux 50,000 sf, Intraspect 51,000 sf, Collabinet 26,000 sf and Multitude.com 47,000 sf. Lastly, in Palo Alto, Oppenheimer, Wolfe & Donnelly LLP leased 53,000 sf at 1400 Page Mill Road.
I’ve been collecting stacks of articles on the dot.com industry laying off employees and giving back space. As I poured over two months (June and July, a critical benchmark in the industry following the April NASDAQ adjustment) of names and figures, I realize that in the larger scope of what’s happening in the Bay Area if we have a few hundred thousand feet of space come back on the market it will be snapped up. Remember that each displaced worker hired by another firm means that the office demand stays static. As the CC Times, 6/17/00 reported, “But what are the long-term prospects for displaced workers? Challenger (John Challenger, CEO of job-placement firm, Challenger, Gray & Christmas) and other job-placement firms say the high-tech industry still is scrambling for qualified workers in a tight labor market. Some company executives report they comb the Internet and papers looking for dot-com failures in hopes of being the first to snap up displaced employees.” As mentioned in the Tri-Valley Herald (6/23/2000) referring to a New York Times article, “The good news, economists say, is that the human toll appears to be limited to individual dotcoms, that the number of employees laid off represents a small fraction of the hundreds of thousands of members of the internet work force, and that nearly all of those who lost their jobs have skills that should help them easily obtain jobs with other technology companies.” The San Francisco Chronicle (6/6/00) reassured us further with the following, “The number of people employed in Internet-related jobs double last year to 2.5 million as the industry enjoyed a 62 percent jump in annual revenues . . . The study found that the entire industry generated nearly $524 billion in revenue in 1999, up a readjusted $322 billion a year earlier. The fastest-growing category was e-commerce, which had a 72 percent increase in revenue to $171.4 billion from $99.8 billion a year earlier as traditional brick-and-mortar retailers such as Sears, Roebuck and Co., embraced Internet sales and companies increasingly began buying their own goods on-line. Forrester Research projected in April that e-commerce could generate $6.9 trillion in revenues by 2003 as businesses are forced by competition to become more efficient and as consumers move beyond buying items with low profit potential such as CD’s and books, into big-ticket categories.”
Talk about non-traditional companies taking non-traditional office space as reported in Office & Industrial Properties, June 2000, Amazon.com foregoes tenant upgrades when it occupies new office space. Every employee, including CEO Bezos, works at a $157 desk made from a door and several 2x4s. Landlords are told not to bother painting, breaking down walls or even shampooing the carpets. Just wire the office, allow around-the-clock access and control the temperature, and Amazonians will go about their business. As Julie Benezet, director of global real estate and facilities stated, “We’re part of the 21st century. There will be many more tenants like us.” A twist on the old slogan, “Please show that employee the door” . . .
The East Bay Business Times recently shared information from the Bureau of Labor Statistics in an article titled, “Growing Easy Bay Labor Force Leads the Bay Area.” “East Bay companies and public agencies employed nearly 1,172,000 people in 1999, well over 200,000 more that in both the major job centers of San Francisco and Santa Clara County, the heart of the Silicon Valley. Many companies continue to find the East Bay a convenient and lower-cost alternative to San Francisco, in particular, so are moving in large numbers to places like Oakland, Emeryville and the Tri-Valley cities of San Ramon, Pleasanton, and Livermore.” And you thought we were just the burbs . . .
In 1999, about 10 percent of new office buildings in the United States incorporated raised-floor construction, and that figure is projected to grow to 35 percent by 2004. This is due to the need for 24x7 voice, data and power, as well as 100 percent churn rates requiring constant space reconfiguration.
In the San Francisco Times, an excellent article titled “No Place Like Home” published in the July 2000 issue of smalloffice.com, listed seven top worries of employers when considering telecommuting for their employees. Worry #1: My janitor will want to work from home . . . It’s true that telecommuters and teleworkers aren’t ideal for every small business. If a person can bring work home for a sick day—and not disrupt the flow of productivity—that person can telecommute. Worry #2: I’ll have to spend a fortune on equipment . . . Not so fast; most businesses already pay for desktops, notebooks, phones and peripherals for employees if they work at the office. Consider buying desktop replacement notebooks. They can be used both at the office and at home. Worry #3: Our telecommuters will be out of the loop . . . If your staff lives and dies by e-mail and surfing the web for research, your best bet is to make sure that members of your telecommuting staff have the high-speed internet access they need. Worry #4: If I let employees telecommute two days a week, they’ll want five . . . This may be true, but if you don’t let them work from home those two days, they may not be working for you very much longer. Worry #6: (I skipped one) They’ll be watching TV instead of working . . . You’ll continue to evaluate and reward job performance the same way as when they worked in the business office: by their results.” What do I know about telecommuting? I am writing this sitting behind my at-home desk wearing just gym shorts, surrounded by fax, copiers, multiple printers, a Dell 800 MHz, three phone lines and getting far more work done than I could do back at the office . . .
As reported in the San Francisco Business Times (6/9/00), “Companies that can’t find or afford space in San Francisco are leasing blocks of live/work apartments to use as offices, a trend that illustrates how dire the city’s office shortage has become. Nobody knows exactly how many live/work units have been turned into offices. Few landlords or tenants are eager to talk about the practice, since it’s possibly illegal and has already generated complaints to the city zoning department.” I suspect this may be also occurring throughout the Bay Area wherever space is tight and expensive.
I was at a recent NACORE session on e-commerce where one of the speakers prophesized that with electronic signatures now legal, there will come a day when the R.E. executive will scan the Internet for office space, be able to tour the space and surroundings by virtual camera, review building and area amenities, be able to pull up the proposed lease document and sign on-line, all without ever having gotten up from the desk. I agree this will be totally possible, but just like buying a house sight-unseen, can you imagine the regional manager who has to come to work everyday in a space he never got to preview? I can imagine dozens of surprise scenarios: “What meth clinic next door? What do you mean there is a wrecking yard outside the conference room window—they never showed us that! I didn’t know the lease next door signed last week was $5/sf cheaper and the landlord gave them $15/sf TI’s—he only gave us paint and carpet and we have better credit!”
Summer in Northern California with a beautiful wife and a three-year old boy has to be paradise on earth. Working hard (12 hour days) but still finding quality family time to tour the Napa Valley (one hour drive), Lake Tahoe with its still snow-capped mountains and wide sandy beaches (three hour drive), San Francisco with so many varying neighborhoods and cultures (45 minutes), Waterworld (10 minutes), Marine World (40 minutes), Pixieland (15 minutes), Fairyland (30 minutes) and most days weather in the 70’s and 80’s. Every weekend there are dozens of fairs and festivals to choose from, all within an easy drive. Our favorite place is still Lake Tahoe, with boating on the lake, spending an entire afternoon building sand castles at the waters edge, playing pee wee golf (Jordan made a hole-in-one all by himself!) and going for exploration walks in the many woods surrounding the lake. I hope you and yours, wherever you are, are enjoying the special places and events in your own locale. Have a great, wonderful summer!
Sincerely,
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